The National Debt: Who Bears Its Burden?

The National Debt: Who Bears Its Burden?
Updated February 28, 2008
Marc Labonte
Specialist in Macroeconomics
Government and Finance Division
Gail E. Makinen
Economic Policy Consultant
Government and Finance Division

The National Debt: Who Bears Its Burden?
The United States has been free of a national debt for only two years, 1834 and
1835. In its first year, 1790, the country faced a debt of $75 million. From FY1998
to FY2001, the federal government ran budget surpluses. Since then, the budget has
returned to deficit, and the debt had risen to $5 trillion by 2007. It rose to a high of
108.6% of gross domestic product (GDP) at the end of World War II; declined to a
post-World War II low of 23.8% of GDP in 1974; and, then, rose to another high of

49.5% of GDP in 1993.

The national debt results from borrowing to finance budget deficits.
Historically, the major cause of debt accumulation has been war. The United States
has financed the extraordinary expenditures associated with war by borrowing rather
than by raising taxes or printing money. This pattern was broken by the large budget
deficits of the 1980s, the first half of the 1990s, and the period subsequent to 2001,
which caused the national debt to rise substantially as a fraction of GDP.
Although economists have long recognized that a national debt imposes an
inescapable burden on a nation, they have debated whether the burden is borne by the
generation who contracts the debt or is shifted forward to future generations. There
has also been some controversy over the nature of the burden.
The current consensus among economists is that the burden of the national debt
is largely shifted forward to future generations. However, the burden imposed by the
national debt does not arise from debt per se, but from budget deficits that gives rise
to a national debt. If an economy is fully employed and the government increases its
expenditures, for example, the resultant increase in aggregate demand will cause
interest rates to rise and this will reduce or “crowd out” interest-sensitive spending
by the private sector. This type of spending is likely to be for capital purposes (e.g.,
business spending for plant and equipment and household spending for housing and
durable goods including automobiles). As a result, the private capital stock inherited
by future generations is likely to be smaller and their real income or output will likely
be lower. It is the reduction in future output that constitutes the burden of the
national debt and it is a burden borne largely by future generations. It is a burden that
cannot be decreased by borrowing abroad even though foreign borrowing could leave
unchanged the size of the private capital stock.
Crucial to the consensus view (and other views) is the assumption that the
economy is fully employed. And the burden discussed must be regarded as a gross
burden in the sense that certain intangible gains must be set against it such as
freedom from tyranny and domination by a foreign power that might have occurred
had the United States lost such a contest as World War II.
This report will be updated periodically.

Background ......................................................1
The Traditional View of the Burden of a National Debt....................2
Suppose Capital Can Flow Internationally..........................4
Would Financing the Deficit by Issuing Money Eliminate the Burden?....4
Do All Budget Deficits That Increase the National Debt Impose a
Burden? .................................................5
The Role of Interest Payments in the Traditional View.................5
A National Debt and National Interest Rates.........................6
The Retirement of the National Debt...............................6
Does Implicit Debt Impose the Same Burden?.......................7
Conclusion .......................................................8
Appendix A. Statistical Data.........................................9
Appendix B. Selective Views on the Burden of a National Debt............11
The “We Owe It To Ourselves” View.............................11
The Buchanan View...........................................12
The Bowen, Davis, and Kopf View...............................13
The Barro View..............................................14
Appendix B. Conclusion.......................................16
List of Figures
Figure 1. Federal Debt as a % of GDP, 1940-2007.......................1
List of Tables
Table 1. Federal Outlays, Receipts and Deficits/Surpluses FY1980-FY2007...9
Table 2. Federal Debt and Interest OutlaysFY1980-FY2007...............10

The National Debt: Who Bears Its Burden?
The United States, from its beginning in 1790 to the present, has been free of
a national debt for only two years, 1834 and 1835.1 The national debt has grown
from $75.5 million in 1790 to $4.3 trillion in 2004. The history of the U.S. national
debt as a percent of gross domestic product (GDP) since 1940 is shown in Figure 1.2
The national debt reached a high of 108.6% of GDP in 1946. It then began a long
decline, reaching a low of 32.5% in 1981. The large budget deficits of the 1980s and
1990s reversed this trend and pushed the percentage to another high of 49.5% in
1993. The federal budget surpluses from FY1998 to FY2001 were used to retire a
portion of the publicly held national debt. Between FY1997 and FY2001, the
publicly held portion of the debt declined by more than $400 billion. Since FY2002,
a return to budget deficits has caused the debt to grow again.
Figure 1. Federal Debt as a % of GDP, 1940-2007

60f G
40% o
1940 1946 1952 1958 1964 1970 1976 1981 1987 1993 1999 2005
Source: Office of Management and Budget
1 In 1834 the national debt was $37,733 and in 1835 it was $37,513. It is generally believed
that the bonds represented by these sums were lost, misplaced, or destroyed and, thus, would
never be presented for payment.
2 Official data on U.S. GDP are available subsequent to 1929. Finding a consistent series
on the national debt prior to 1940 is difficult because the treatment of U.S. Agency debt is
not consistent across time. When a somewhat comparable series for gross debt for the
period 1929-1939 is used, it is shown to rise from 16.6% of GDP in 1930 to 44.3% in 1934.
It then remains in the low 40% range until 1938, rising to 45.5% in 1939. However, the rise
from 1930 to 1934 is due mainly to the decline in GDP during the Great Depression. During
the period 1934-1938, the national debt grew at about the same rate as GDP.

When evaluating the burden of the national debt, the gross debt must first be
divided into two parts: debt held by the public (including the Federal Reserve),
shown in Figure 1, and the amount held in accounts called federal trust funds, the
principal one being for social security.3 Because trust fund debt is owed to one part
of the government to another, it has no effect on the economy, and does not impose
any burden.4 Thus, it will be neglected in the discussion below. The publicly held
debt is often subdivided into that portion that is domestically owned and that portion
owned by foreigners. U.S. Treasury securities have become increasingly popular
among foreigners. At the end of 2007, over half of the privately held federal debt
was owned by foreigners. If the debt held by the Federal Reserve (and other
government accounts) is included, the total publically held debt, the percentage
owned by foreigners drops to about 25%.
The need to finance wars has been the major reason for the growth of a national
debt. In common with other major countries, the United States has rarely financed
the surge in wartime expenditures exclusively by raising taxes. A large part of
wartime expenditures have been bond financed. During the Civil War, from mid-

1861 to mid-1865, the national debt grew from about $65 million to $2.7 billion.

Between mid-1916 and mid-1919, the increased debt associated with World War I,
grew from $1.2 billion to $25.5 billion. And from mid-1941 to mid-1946, the debt
associated with World War II, rose from $49 billion to $269 billion. Thus, it has
been a common practice of American public finance to increase the national debt
during wartime and then reduce the debt, at least as a percentage of GDP, during
times of peace. This pattern was broken during the 1980s and early 1990s when the
national debt grew both absolutely and relative to GDP. Recently debt has again
grown in wartime; however, the recent increase in the debt has greatly exceeded the
cost of the war. Growth of the national debt has also occurred during periods of
economic contraction.
The Traditional View of the Burden
of a National Debt
Is a national debt a burden on a country? If it is, what is the nature of the
burden? Who bears this burden? Questions such as these have perplexed economists
at least since the days of Adam Smith. Great Britain in his day had accumulated a
large national debt fighting the Seven Years War (the French and Indian War) and
was about to add a further considerable sum suppressing the rebellion in its American

3 Traditionally, the national debt of a country has consisted only of its interest-bearing debt.
Non-interest-bearing debt or currency, even though a technical liability of the government,
has been excluded from national debt calculations.
4 Because of various accounting conventions and practices used by the federal government,
it is possible for the gross debt of the United States to rise even as the publicly held portion
declines. And, indeed, this occurred from FY1998 to FY2001.

Interestingly, mainstream macroeconomics views the burden of a national debt,
not in terms of the debt per se, but in terms of government budget deficits that are the
cause of the debt and its growth. Thus, the burden that a national debt imposes on
a country is due to the government’s budget deficits.5
To see clearly the nature of this burden and who bears it, assume that the
country’s resources are fully employed and that capital (or saving) cannot flow
internationally between countries. Also assume that this country now engages in a
war with a neighbor and that the increased expenditures associated with the war lead
to a budget deficit that is financed by issuing bonds.
The increase in government expenditures increases aggregate demand. In a fully
employed economy, in addition to raising prices, the increase in demand will lead to
a rise in interest rates.6 The increase in interest rates is the means by which the
government obtains the additional resources to fight the war for the increase will
discourage interest-sensitive spending by the private sector. This is primarily
business spending for capital goods such as plant, equipment, and structures and
spending by households for homes, automobiles, appliances and the like. Thus, the
budget deficit “crowds out” private capital and the burden of the growing national
debt represented by the bonds issued to finance the war, is the decrease in the private
capital stock of the country. The level of output is determined by the capital stock,
labor force, and productivity levels. Since the private capital stock inherited by
future generations will be smaller, it implies that the level of output enjoyed by them
will be lower.7 The lower level of output is thus the ultimate burden of the debt and
it is a burden that is largely shifted forwarded to future generations.8

5 The literature on the burden of a national debt is extensive. It is selectively reviewed in
Appendix B.
6 The mechanism by which this occurs is presented in the literature in several ways. Often
is it said that the increase in government expenditures and the resultant rise in the budget
deficit reduces national saving. The reduction in national saving then causes interest rates
to rise to allocate the reduced flow of saving over private investment. Alternatively, the rise
in real (or inflation adjusted) interest rates occurs because the government must float
additional bonds to cover the deficit. And it is this increased demand for funds in financial
markets which raises interest rates. Finally, the increase in real interest rates is said to come
from an increased demand for money as income increases in response to the rise in
aggregate demand. This increase in money demand, in the presence of a fixed money
supply, causes interest rates, the price of money, to rise to restore equilibrium between
demand and supply.
7 If additional resources were made available through additional saving by the public, the
increase in government expenditures would not raise real interest rates and crowd out
private investment. (This is identified as the Barro view in Appendix B.) This would not,
however, eliminate the burden of the debt. It would merely shift it forward to the present
generation. The consumption of this generation would be reduced by the additional saving.
8 Some of the burden will be borne by the current generation (or generation present when
the debt is contracted) for they will share part of the lower output over their remaining life
as well. Of course, this burden must be regarded as a gross burden. Some budget deficits
are incurred to increase the stock of social capital such as highways, power grids, water
supplies, etc. This capital may perform a very useful and complementary role relative to

Suppose Capital Can Flow Internationally
It might be thought that a high degree of international capital mobility could
moderate the burden of the debt because foreign saving could supplement domestic
resources such that the private capital stock need not diminish. Suppose, for
example, that as interest rates tended to rise in response to the increased
expenditures, foreign capital (or foreign saving) was attracted in sufficient volume
to keep domestic interest rates from rising.9 This would keep the domestic capital
stock unchanged. Would this mean that there was no burden from a national debt?
Unfortunately, this is not the case. Although it is true that the private capital stock
inherited by future generations will remain unchanged, a portion of it will now be
owned by foreigners. And the rewards from that capital will not flow to Americans,
but will have to be transferred abroad.
Thus, having foreigners supply some or all of the resources for the war effort,
as in this example, does not avoid the burden of the debt. Future generations will
still have a lower level of income available to them.
Would Financing the Deficit by Issuing
Money Eliminate the Burden?
In the preceding discussion, the budget deficit was financed by issuing interest-
bearing debt or bonds. The government, however, has available another means for
financing its budget deficit. Rather than borrowing the wherewithal it could simply
print money (currency) and pay its bills.10 Might not this method of finance reduce
or eliminate the burden the national debt places on future generations? Although the
simple answer is basically yes, the explanation is more complicated.
Financing a budget deficit in a fully employed economy by issuing money is
inflationary. And inflation is a form of taxation. It is tax on the existing stock of
money held by the public in the sense that it reduces the purchasing power of that
money. It is by reducing the wealth and purchasing power of the private sector that
inflation enables the government to obtain the additional resources to finance the
war. Inflation (taxation) thus crowds out private spending, some of which may be
spending on capital goods. The majority of that spending, however, is likely to be
on current consumption. Because it is, the burden of these additional government

8 (...continued)
private capital in increasing output. In addition, offset against the burden of other types of
spending may be a large immeasurable gain enjoyed by future generations such as freedom
from tyranny and domination by another country.
9 It should be recalled that foreign capital or saving comes to a country in the form of a trade
deficit. It is the trade deficit or excess of imports over exports, that allows a country to use
more goods and services than it produces. It is this excess that makes it possible, in this
example, to use resources for war and, at the same time, keep the capital stock from falling.
10 This was the principal means used by the Continental Congress to finance the American
Revolution. The Confederacy used this means heavily in the American Civil War. It was
used to a lesser degree by the Union government.

expenditures, used in the example above, are almost exclusively borne by the current
generation. The private capital stock inherited by future generations is unlikely to be
diminished and, hence, they will not suffer much of a decrease in their standard of
living. Thus, financing a budget deficit by substituting non-interest-bearing debt
(money) for interest-bearing debt (bonds) does not eliminate the burden of the debt;
it largely shifts the main burden from future generations to the present generation.11
Do All Budget Deficits That Increase the
National Debt Impose a Burden?
The preceding analysis is framed in terms of a fully employed economy that
experiences an increase in aggregate demand due to an increase in government
expenditures. This increase in demand requires an increase in real interest rates to
decrease or crowd out private sector spending. Yet there are circumstances under
which a government budget deficit can arise or increase with little or no crowding
Suppose, for example, that the United States economy is in a recession and
either expenditures are increased or taxes cut in an effort to “jump start” an
expansion. It is possible in these circumstances for a budget deficit to grow without
increasing interest rates. The reason being that the increase in income generated by
the increase in demand generates additional saving for financing the deficit. The
additional resources represented by the saving make it possible to maintain an12
undiminished private capital stock in the face of a rising budget deficit. Thus, debt
issued during a recession imposes a smaller burden than an equivalent amount issued
during an economic expansion; if the recession is serious enough the burden is
The Role of Interest Payments in the Traditional View
The accumulation of a national debt means that the government budget will
contain as an expenditure item the interest payable on that debt. Does this impose a

11 Another way of expressing what is occurring is to say that as inflation erodes the real
value of the public’s money holdings, it must refrain from using income for consumption
in an effort to restore it’s real money balances. This reduced level of consumption is then
the burden of the debt and it is a burden borne by the current generation.
12 Similarly, a budget deficit that rises as an economy goes into a downturn is unlikely to
“crowd out” private investment since it will not force up interest rates. The most that can
be said is that the deficit may keep interest rates from falling as much as they would
otherwise. In that sense, the deficit reduces the hypothetical capital stock available to future
13 This part of the traditional view on debt burden seems to be incomplete or based on the
implicit assumption that a national debt accumulated in periods when the economy is
operating at less than full employment is retired during periods when the economy is
operating at full employment. If this is not the case, and the country faces a budget deficit
even at full employment, the prospect arises of an ever-growing national debt. A case can
be made that should the debt continue to rise relative to GDP the fiscal regime may be
unsustainable over the longer run.

burden on future generations whose taxes will be used for debt service? In the
traditional view, the answer depends on whether the debt is internally or externally
held. For an internally held debt, the payment of interest is an income transfer from
taxpayer to bond holder. In the simple case, if they are the same person, they are left
neither poorer nor richer. If they are not the same person, then while the taxpayer is
left with less income, the bond owner has a larger income. As a group, however, they
are neither richer nor poorer by the payment of interest. The payment of interest is
not an additional burden of an internally held debt. That burden, as noted above, is
the lower level of output (income) enjoyed by future generations who inherit a
reduced private capital stock.
When the national debt is externally held, the payment of interest abroad is a
transfer of income from Americans to foreigners. This is not a separate burden from
the national debt, however. As noted above, when a national debt is sold abroad, the
private capital stock passed on to future generations need not be diminished. But a
portion of that capital stock will be foreign owned and a portion of the income
generated by that capital will accrue to foreigners. This is the interest or, more
properly, debt service paid to them, and it reduces the level of income that accrues
to Americans. Thus, the payment of interest to foreigners is how the burden of an
externally held national debt is shifted forward to future generations of Americans.
A National Debt and National Interest Rates
It might be thought that a large national debt would have an effect on market
interest rates since if the debt is short term, the government must be in financial
markets more or less continuously as the debt rolls over frequently. Such is not the
case. The rate of interest that prevails in a country over time is determined by saving
and investment and these are what economists call flows. The national debt is what
they call a stock. And it is the flows that govern the real rate of interest. The
refinancing of the national debt when the budget is balanced should not alter the
flows. Essentially, refinancing involves replacing maturing securities with ones that
come due in the future. Since this makes no new net claim on the nation’s saving,
it should have no effect on interest rates. If this were not the case, we should observe
real national interest rates fluctuating with the size of a nation’s national debt. This
pattern is not to be found consistently in the data.
There are historical examples in which countries have had difficulties in rolling
over their maturing interest-bearing debts. Often these episodes have been attributed
to a lack of confidence in the governments in question. When these episodes have
occurred, they have often resulted in the monetization of the maturing debt with the
result being serious inflation and rising market interest rates as the market rates come
to embody expectations of inflation. Thus, a very large debt could increase interest
rates by threatening the government’s solvency. The U.S. debt is not near this point.
The Retirement of the National Debt
The budget surpluses from FY1998 through FY2001 were used to retire the
national debt. By the end of 2001, debt held by the public was some $400 billion
below its 1997 peak. What are the effects of debt retirement on the U.S. economy?

In the traditional model, the effect on the economy from retiring an internally
held debt is just the reverse of what would happen if the national debt were increased.
The budget surpluses augment the national pool of saving, a pool contributed to by
the business and household sectors. An increase in the fraction of GDP that is saved
leads to lower interest rates. This encourages (or “crowds in”) interest-sensitive
spending. From the previous discussion, this is business and household spending on
capital goods. Thus, the budget surpluses increase the capital stock of the country
and, over time, this raises the level of real income and the material well-being of
Americans. This, then, is the benefit that comes from reducing the national debt. It
is a benefit that comes from budget surpluses and it largely benefits future
In a broader framework in which the U.S. economy is linked to foreign
economies through trade and capital flows, the interaction of budget surpluses,
retirement of the national debt, and its effect on the U.S. economy, is more complex.
Retiring debt that is foreign owned relieves the United States from having to pay
interest to foreigners. This raises the fraction of U.S. GDP that is available to
Americans and this benefits the current generation as well as those alive in the future.
In addition, since the higher saving rate leads to lower interest rates in the United
States, some of that additional saving is likely to flow abroad augmenting the capital
stock of foreign countries. This, in turn, increases the claims of Americans on
foreign output (or decreases the net claim foreigners have on U.S. output) thereby
enhancing their material well-being about the same as would have occurred if those
resources had been used to augment the domestic capital stock.14
Does Implicit Debt Impose the Same Burden?
So far, this report has focused on explicit national debt, the issuance of U.S.
Treasuries to the public. But the recent work of economists in the area of
generational accounting has resulted in a better appreciation of the equivalence
between explicit and implicit national debt. These economists argue that categories
of government activity such as “expenditures,” “revenues,” and “deficits” are
economically arbitrary. Instead, the focus should be on the economic incidence of
any government policy over time, regardless of its label. They argue that today’s
explicit budget deficit is paltry compared with the large budget deficits that will
accrue in the distant future as implied by current policy. And these implicit deficits
currently impose the same burden on future generations as if they were made explicit
today through the issuance of U.S. Treasuries.

14 It was noted above that in the traditional view, the interest paid on an internally held debt
is regarded as an income transfer and not as a burden. When an internally held debt is
retired, the interest expenses of the government fall. If the taxes used to pay these expanses
are not reduced through a tax cut, but are used instead to purchase goods and services, it
increases the size of the government. Thus, a case can be made that some of the decline in
the interest expenses in the federal budget from debt retirement should be matched by a tax
cut. This argument does not apply to the portion of the interest expenses that are used to
service the foreign held component of the national debt.

This can be illustrated by examining the Social Security system. The retirement
of the baby boomers means that the current “pay as you go” system will become
insolvent in the future under current policy — benefits promised will greatly exceed
payroll tax revenues. If it is assumed that all legally promised benefits will be met
in the future, then large payroll tax increases will be necessary. Thus, future
generations would be forced to consume fewer goods and services because a larger
part of their income would be taxed and transferred to Social Security recipients.15
Taxing working generations in the future to pay unfunded retirement benefits
is not the only way to deal with this problem. There is an alternative that imposes the
same burden on future working generations. Imagine that the present discounted
value of those future unfunded social security benefits were included as an outlay in
this year’s budget. Each baby boomer would be given a one-time payment today in
lieu of their future unfunded benefits. This added expenditure would increase the
size of the present budget deficit, reduce the national saving rate, and would be
financed by issuing additional Treasury securities. This would increase interest rates,
lower private capital spending, and reduce the size of the economy in the future. As
a result, the pre-tax income of future generations would be smaller, but because they
would not have to pay higher taxes to fund the additional social security benefits,
their after tax income at that time would be the same as it would be in the situation
above where the future unfunded benefits were paid for with higher taxes. Thus, an
implicit debt imposes the same burden on future generations as an explicit debt
because the two concepts are economically equivalent.
The current consensus view among economists is that the source of the burden
associated with a national debt is the government budget deficit that gives rise to the
debt. In a fully employed economy, the deficit “crowds out” private sector spending,
especially spending on capital goods. Thus, a smaller private capital stock and a
lower level of output are passed along to future generations and it is this lower level
of output that is the ultimate burden of the national debt. And, it is a burden that is
largely shifted forwarded to future generations. Thus, according to the consensus
view, the burden of a national debt is borne by future generations.
Should the debt be sold abroad, there is still a burden since a portion of the
output from the unchanged size of the private capital stock will accrue to foreigners.
When the national debt is retired through budget surpluses, the effect on the
economy is the reverse of debt increases. Future generations acquire a larger capital
stock (or a larger American owned capital stock) and a higher level of output (or
increased material well-being).

15 Returning Social Security to solvency through benefit cuts would create an equivalent
burden. Since retirees would receive lower benefits, they would be able to purchase fewer
goods and services. Assuming taxes were raised or benefits were cut at the same date, the
generational incidence of this burden would be slightly different, however. The burden of
higher taxes would be felt by workers from that date forward, while the burden of lower
benefits would be felt by retirees from that date forward. Thus, an older generation (retirees
at that date) would share in the burden of a benefit cut.

Appendix A. Statistical Data
Table 1. Federal Outlays, Receipts and Deficits/Surpluses
FiscalOutlaysReceiptsDeficit or Surplus
Year$ Billions% of GDP$ Billions% of GDP$ Billions% of GDP
2007 2,730.2 20.0 2 ,568.2 18.8 -162.0 -1.2
2006 2,655.4 20.4 2 ,407.3 18.4 -248.1 -1.9
2005 2,472.2 20.2 2 ,153.9 17.6 -318.3 -2.6
2004 2,293.0 19.9 1 ,880.3 16.4 -412.1 -3.6
2003 2,160.1 20.0 1 ,782.5 16.5 -377.6 -3.5
2002 2,011.2 19.4 1 .853.4 17.9 -157.8 -1.5
2001 1,863.2 18.5 1 ,991.4 19.8 128.2 1 .3
2000 1,789.2 18.4 2 ,025.5 20.9 236.4 2 .4
1999 1,702.0 18.7 1 ,827.6 20.0 125.6 1 .4
1998 1,652.7 19.2 1 ,722.0 20.0 69.2 0 .8
1997 1,601.3 19.6 1 ,579.3 19.3 -22.0 -0.3
1996 1,560.6 20.3 1 ,453.1 18.9 -107.5 -1.4
1995 1,515.9 20.7 1 ,351.9 18.5 -164.0 -2.2
1994 1,461.9 21.0 1 ,258.7 18.1 -203.3 -2.9
1993 1,409.5 21.4 1 ,154.5 17.6 -255.1 -3.9
1992 1,381.6 22.1 1 ,091.3 17.5 -290.4 -4.7
1991 1,324.3 22.3 1 ,055.1 17.8 -269.4 -4.5
1990 1,253.1 21.8 1 ,032.1 18.0 -221.2 -3.9
1989 1,143.8 21.2 991.2 18.4 -152.5 -2.8
1988 1,064.5 21.3 909.3 18.2 -155.2 -3.1
1987 1,004.1 21.6 854.4 18.4 -149.8 -3.2
1986 990.4 22.4 769.2 17.4 -221.2 -5.0
1985 946.4 22.9 734.1 17.7 -212.3 -5.1
1984 851.9 22.2 666.5 17.4 -185.4 -4.8
1983 808.4 23.5 600.6 17.4 -207.8 -6.0
1982 745.7 23.1 617.8 19.0 -128.0 -4.0
1981 678.2 22.2 599.3 19.6 -79.0 -2.6
1980 590.9 21.7 517.1 19.0 -73.8 -2.7
Sources: Office of Management and Budget, Historical Tables. Fiscal Year 2009, Washington, 2008, table 1.3.

Table 2. Federal Debt and Interest Outlays
Debt Held by the PublicInterest Outlays
Year% of % of Budget% of
$ BillionsGDP$ BillionsOutlaysGDP
2007 5,035 36.8 237.1 8 .7 1.7
2006 4,829.0 37.1 226.6 8 .5 1.7
2005 4,592.3 37.5 184.0 7 .4 1.5
2004 4,295.537.4160.27.91.4
2003 3,913.436.2153.17.11.4
2002 3,540.434.1170.98.51.6
2001 3,319.6 33.0 206.2 11.1 2 .0
2000 3,409.8 35.1 223.0 12.5 2 .3
1999 3,632.4 39.8 229.8 13.5 2 .5
1998 3,721.1 43.1 241.1 14.6 2 .8
1997 3,772.346.1244.015.23.0
1996 3,734.1 48.5 241.1 15.4 3 .1
1995 3,604.4 49.2 232.2 15.3 3 .2
1994 3,433.1 49.4 202.9 13.9 2 .9
1993 3,248.4 49.5 198.7 14.1 3 .0
1992 2,999.7 48.2 199.3 14.4 3 .2
1991 2,689.0 45.3 194.4 14.7 3 .3
1990 2,411.6 42.0 184.3 14.7 3 .2
1989 2,190.7 40.5 169.0 14.8 3 .0
1988 2,051.6 40.9 151.8 14.3 3 .1
1987 1,889.8 40.7 138.6 13.8 3 .0
1986 1,740.6 39.5 136.0 13.7 3 .1
1985 1,507.3 36.4 129.5 13.7 3 .1
1984 1,307.0 34.0 111.1 13.0 2 .9
1983 1,137.3 33.0 89.8 11.1 2 .6
1982 924.6 28.6 85.0 11.4 2 .6
1981 789.4 25.8 68.8 10.1 2 .3
1980 711.9 26.1 52.5 8 .9 1.9
Sources: Historical Tables, Fiscal Year 2009, Washington, 2008, table 7.1 and table 3.1.

Appendix B. Selective Views on the
Burden of a National Debt
Although economists have long recognized that a national debt imposes an
inescapable burden on a nation, they have argued about who bears this burden.16 In
particular, whether the burden is borne by the generation that incurred the debt or
whether it is shifted forward to a future generation or, in the language of the time,
whether it is a “burden or mortgage on our children.” This issue acquired new
urgency when the view (since discarded) took hold in the economics profession that
mature market economies might be incapable of generating sustained periods of
more or less full employment without a continuous government budget deficit. If this
were the case, the national debt could be expected to grow continuously. And if that
debt were a burden on future generations, it would mean that the present generation
would enjoy employment only by shifting a burden to future generations.
This appendix provides a flavor of the various arguments advanced by
economists about the burden of the public debt, the nature of that burden, and who
bears that burden. The arguments summarized in this appendix are all concerned
with an internally held debt. It is recognized that an externally held debt must be
treated differently.
The “We Owe It To Ourselves” View
As a result of the concern over whether the enjoyment of full employment by
the current generation would shift a burden to the future, it became an accepted view
during the 1930s, 40s, and 50s, that an internally held national debt would impose
a burden only on the generation present when it was contracted and would impose
no burden on future generations because we “owe the debt to ourselves.” The words
of Paul Samuelson best express the view that the current generation bears the burden
of deficit finance. Drawing on wartime experience, he wrote: “To fight a war now,
we must hurl present-day munitions at the enemy; not dollar bills, and not future
goods and services.” Thus, the alternative use of these resources in the private
sector constituted the burden of the national debt and it was a burden borne by the
generation that, in this case, fought the war.
That subsequent debt service imposed no burden on future generations can be
clearly seen in the simple case where the owners of government bonds, the evidence
of the national debt, were also taxpayers. Servicing the government debt would mean
taking money from one pocket and putting it into the other. In other words, this is
a mere income transfer. It is not a burden. Since future generations would inherit
both the bonds and the tax liabilities needed to service the bonds, no burden would
be shifted to the future. In a more complex case in which the bond owners and
taxpayers were not the same people, the existence of a national debt would imply
some income redistribution from the latter to the former. However, this would not

16 For a more comprehensive review of the burden of a national debt, see Public Debt &
Future Generations, edited by James M. Ferguson (Chapel Hill: The University of North
Carolina Press, 1964) and Randall Holcombe, John D. Jackson, and Asghar Zardkoohi,
“The National Debt Controversy,” Kyklos, 34 (1981), pp. 186-202.

be a burden for the society as a whole because there would be no loss of resources
for the group as a whole to use.17 Thus, the burden of an internally held debt,
according to this view, is borne by the generation alive when the debt is contracted.
And the burden consists of the alternative private sector uses of the resources that
are withdrawn for use by the public sector.18
Should the national debt be owned by foreigners, this view argued that it would
constitute a burden primarily on future generations. The current generation, by
borrowing resources from abroad, would have more goods and services to consume
than it produced. It thereby gains by incurring a foreign debt. To service this debt
a portion of future national output would have to be transferred abroad thereby
reducing the income of future generations who, the argument states, would have
fewer goods and services to use than it produced. Thus, in the case of an external
debt, we would not “owe it to ourselves” but to foreigners. And this was the
important distinction as far as who bears the burden was concerned.
The Buchanan View
Prof. James Buchanan, a Nobel Prize winner in the 1980s, attacked the then
orthodox view of burden of the debt in his popular text book on public finance first
published in 1958.19 Buchanan’s argument is that the burden of an internally held
national debt is shifted forwarded to future generations. It is not borne by the
generation who contracted the debt. His argument is that when individuals buy
government interest-bearing debt, they are making a voluntary decision to give up the
current use of resources for a larger future income (larger by the amount of interest
they receive on their now larger asset holdings). Since this is a voluntary decision,
no burden is imposed on the purchaser (i.e., the generation present when the debt is
contracted). In fact, since the purchase would not have been made had a superior
alternative been available, the purchaser is actually better off than had an alternative
use been made of that income. However, subsequent generations of taxpayers must
surrender to the bond holders the wherewithal for debt service. And this necessity

17 Notice that this argument neglects the fact that the budget deficit that gave rise to the debt
could have crowded out private investment thereby reducing the capital stock inherited by
future generations and the lower level of income that this reduction implies. It may well be
that this view was substantially influenced by economic conditions during the depressed
1930s when budget deficits were unlikely to have crowded out private investment. It should
also be noted that this and other arguments about the burden of a national debt abstracted
from the possibility that the taxes to service the debt may have far reaching consequences
for the incentives to work, save, invest, and take risks, all of which are important in market
economies and that affect the long run level of output.
18 This view of burden seems to imply that the resources withdrawn for use by the
government comes at the expense of private sector consumption. For if private sector
investment were curtailed, then some of the burden will be shifted to the future as suggested
by the crowding out view discussed above. This view may also have been influenced by U.S.
experience during World War II when a large part of crowding out did take the form of a
decrease in private consumption. It should be noted that the above view of burden was
formulated before economists had developed growth models. Once growth models were
developed, they forced economists to think differently about debt burden.
19 Public Principles of Public Debt (Homewood, IL: Richard D. Irwin, 1958).

is forced on them. In this sense, it is the future generations who will bear the burden
of an internally held debt and the burden is the taxes they must pay for debt service.
This is not a voluntary decision, but one forced on them by the decisions of an earlier
generation. Although Buchanan’s view was subject to criticism by some economists,
he was soon to get major support from others.20
The Bowen, Davis, and Kopf View
Acknowledging that Buchanan’s view had stimulated their collective thinking,
Professors Bowen, Davis, and Kopf (hereafter BDK) came up with an argument for21
why an internally held debt imposes a burden on future generations. BDK define
burden in terms of the lifetime consumption of a generation (as opposed to the
resources that must be given up now to, let us say, fight a war). The generation
whose lifetime consumption is reduced is, according to BDK, the generation
burdened by a national debt. With this in mind, they argue that the generation that
contracts the national debt need not be burdened by it so long as it does not pay the
debt off. This is so, because while that generation must decrease its consumption to
buy the debt (even if they are forced to do so), it can always sell it to the next
generation before its members die and enjoy the added consumption it had to forego
when it purchased the debt. This process can go on indefinitely until the debt is22
retired. The generation that retires the debt, however, has no additional
consumption to offset the consumption it gave up when it purchased the debt from
the generation before it. Thus, BDK share in common with Buchanan a belief that

20 Prof. James Tobin was an important critic of Buchanan. He was concerned with
Buchanan’s view of burden. If a person voluntarily does something, it is no burden to that
person, according to Buchanan. This suggests to Tobin that a person who voluntarily
purchases a good on which an excise tax is levied incurs no tax burden. Yet, there is a
whole literature in public finance on the “incidence and effects” of taxes that Buchanan’s
notion of burden seems to throws away. Perhaps, in reference to the national debt, it would
be more appropriate and less troublesome to ask “who bears the incidence of the debt”
rather than the burden of the debt.
21 “The Public Debt: A Burden on Future Generations?” American Economic Review, 50
(September 1960), pp. 701-706 and “The Distribution of the Debt Burden: A Reply,”
American Economic Review 51 (March 1961), pp. 141-143.
22 There is, however, the question of the time distribution of that consumption.
Consumption is given up early in the life of the current generation to be recouped at a later
period when the debt is sold to the next generation. But consumption at a later date is
unlikely to be of equal value to the consumption given up when the bonds are purchased.
Because it is not, individuals must be rewarded for postponing consumption until later. And
this is the role of interest in the BDK model. It is the reward paid to bond holders for
postponing current consumption until later. The present discounted value of those interest
payments and the principal, should be equal in value to the consumption that could be
enjoyed today if the bonds were not purchased. From that perspective, the lifetime
consumption of the current generation is not reduced. However, paying interest involves
having to pay taxes, and taxes reduce the lifetime ability of any generations to consume.
Thus, on balance, debt financing reduces the net lifetime consumption of every generation
which means that part of the burden of debt is spread across all generations including the
generation present when the debt was contracted.

the national debt is a “burden on our children.” It is they who must ultimately retire
the debt and, with retirement, undergo a permanent reduction in their consumption.23
The Barro View
The most recent, innovative, and serious challenge to the conventional view of
the burden of a national debt comes from Prof. Robert Barro.24 As noted in the body
of this report, crowding out would not occur and the burden would not be shifted
forward to future generations if the current generation would only save an additional
amount of resources to match the increased demand for resources represented by the
additional government expenditures that are financed by issuing interest-bearing debt.
Barro has an ingenious argument for why such behavior could be forthcoming.
Suppose, he says, that individuals live forever and that they have as a goal the
maximization of consumption over time. To attain this goal, they have to be
concerned about the private capital stock for it is an important determinate of income
and income governs consumption. As in the standard macroeconomic model, the
saving behavior of the public governs the resources available for capital goods
purposes. How much of their income they save, and, hence, private investment, will
depend on how they value current as opposed to future consumption.
If individuals live forever, Barro argues, they will be indifferent between the
government using taxes or the sale of bonds to finance, let us say, additional
expenditures related to war. If the additional expenditures are financed through an
additional tax, the public, in an effort to keep the private capital stock (the key to its
goal of maximizing consumption) unchanged, will reduce current consumption by
the amount of the tax. As a result, the burden of the war-related expenditures will
be felt when they are incurred.25
Alternatively, the government could have chosen to finance the additional
expenditures through the sale of bonds or interest-bearing debt. Had this option been
chosen, the public would have behaved in the same way. In order to keep the private
capital stock at the optimum level over time, it would have to reduce its consumption
and save a higher fraction of its income. This additional saving would then be used
to buy the bonds and provide the resources to the government for the war.
It might be thought that the necessity to pay interest on the bonds over time
(and, perhaps, provide for their redemption) would, by requiring additional taxes,
shift a burden forward. This is not the case, for the taxpayer and the bondholder are
the same people. Money is simply taken from one pocket as taxes and put back into

23 BDK were careful to remind the reader that there is nothing inherently undesirable with
debt financing of government. For example, if such government spending was for capital
goods that benefitted future generations, a case could be made that they should be burdened
by their cost (or a sort of pay-as-you-use system).
24 “Are Government Bonds Net Wealth?” Journal of Political Economy, 82 (November-
December 1974), pp. 405-14.
25 If individuals do not live forever, and it will be shown later that this isn’t crucial to
Barro’s argument, it could be said that the burden of the war expenditures were felt by the
generation alive when they were incurred.

the other pocket as interest. This is no additional burden. To the extent that the
taxpayer and bondholder are different people, some income redistribution could be
expected. Thus, if individuals live forever, they would be indifferent between
financing these added expenditures through a tax increase or the sale of bonds.26
And, the burden of the debt is felt in terms of reduced consumption. It is a burden
borne at the time the additional expenditures are made.
Barro must deal with the fact that individuals do not live forever. To address
this problem, he asks: are there circumstances under which they would behave as if
they had eternal life? He argues that this behavior would be forthcoming if
individuals treat the well being of their children on a par with their own. Since their
children would behave similarly, and so on, individuals in the current generation
would behave as if they lived forever. If individuals behaved in the way Barro
argues, the conventional argument about the burden of a national debt, is likely to be
wrong. Debt financed government expenditures will not crowd out the private
capital stock because it will be offset by an equal amount of private sector saving.27
This behavior is designed to ensure that future generations do not inherit a smaller
private capital stock and, hence, a lower level of output and suboptimal consumption.
Thus, the burden of the national debt is not shifted to them as the convention view
argu es. 28
The attack on Barro’s view has been both theoretical and empirical. On the
theoretical side, it is argued that individuals for a number of reasons may be reluctant
to equate the well-being of their children on a par with their own (this presumes that
the individuals under scrutiny have children).29 On the empirical side, the saving
behavior of the private sector does not correlated well with the saving/dis-saving
behavior of the public sector. The Barro view implies that this behavior should be
highly correlated: on a one-to-one basis. Only in this way is the private capital stock
passed on to future generations rendered immune to the public finances of

26 This taxpayer indifference between bond or tax financed government expenditures has
been attributed to a founder of modern political economy, David Ricardo. It has been shown
that this so-called Ricardian Equivalence is not the true view of Ricardo. On the contrary,
Ricardo argued that the taxpayers would not be indifferent, but would generally prefer to
finance such expenditures by selling bonds rather than paying additional taxes.
27 Technically speaking, the current generation need not save a precisely offsetting sum from
current income. This is because the current generation can always leave a bequest to the
next generation.
28 Barro further argues that if the current generation wanted to ensure that their children
inherited a smaller private capital stock, they have a simple means to do so: they could save
a smaller portion of their disposable income. They don’t need a government budget deficit
for that purpose. Thus, in the presence of a budget deficit, they are, according to Barro,
likely to offset it with a higher saving rate. The opposite is supposed to occur when it is
faced with a budget surplus.
29 For a more complete theoretical critique of Barro, see James Tobin, Asset Accumulation
and Economic Activity (Chapter III) (Chicago: University of Chicago Press, 1980), pp. 49-


Appendix B. Conclusion
This appendix has provided a flavor of the various arguments advanced by
economists about the burden of the public debt, the nature of the burden, and who
bears that burden. It has basically been a debate about who bears the burden.
According to the various views, the burden, depending on how it is defined, can be
borne by the generation that contracted the debt or shifted forward to future
generations. The arguments summarized in this appendix are all concerned with an
internally held debt. It is recognized that an externally held debt must be treated